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01. Raising money
Your first, most important and possibly only job, is to make sure you don’t die as a business before your idea is able to be expressed.
That nearly always requires raising money.
Raising is very different at different rounds. In this handbook we focus on very early stage startups, which we are defining as anything up to taking a large Series A cheque. So much of the advice inside covers the period from bootstrap (i.e. using your savings) to Seed Plus (you have a product and customers and investors, but probably haven’t hit more than $1-1.5 million ARR yet).
There’s also an excellent and free guide to raising money that came out after I wrote a couple of drafts for this. It’s called , by a VC called the . What follows is a slightly cynical founder’s cut on the problem, rather than a VC’s take. But I couldn’t recommend their guide more.
Should you even raise?
This is a stupidly hard question, and I really struggle with it myself.
Doing a business just with angels or family and friends is much easier. But you are almost certainly going to leave a lot of money on the table, and you are (probably) not going to find out just how far you can go. We are all pretty bad at estimating what we are really capable of.
The nice thing about going through and getting a professional to give your vision money is that it lifts your eyes up and gives you a lot of confidence to face the world. Also, it gives you some pattern knowledge as to what to expect; gives you an advantage in recruiting; and gives you a much higher level of professionalism.
That said: Raising requires a lot of energy, and a lot of ego. Remember this is largely what investors will remember of you, how upbeat you were, and how bullish on your firm you may be. And remember also that you have to believe. No one else. Make it so. You got this.
To have that belief, you need to preserve your mojo. Some ways to protect this energy are to accept no’s quickly, and move on to the next conversation fast (how do you know if it is a no? If it isn’t a yes and they are not calling you, it is a no). Focus on the next thing. Investors will be back. Promise.
Source: Mean Girls, the real ultimate guide to fundraising.
Structuring your company so people can invest
OK, first up, you have to prepare yourself.
Taking someone else’s money is a commitment. They who pay the piper, call the tune. If you don’t want to deal with other people’s opinions and regular judgment on you, don’t take their money. This will hurt.
Some basic first tips: Don’t offer a percentage until you know what you are doing. Keep it simple with shares etc. Expect everyone will be in it to wet their own beaks; you will get a LOT of people offering to help, but they will all expect “upside”, “sweat equity”, etc. It can be very hard to say no to these. They all seem persuasive.
Remember that every person you say yes to now, is likely to mean a bunch of people you have to say no to in the future.
"No." Source: Muppets Wiki GIPHY
People will want either equity or a convertible (SAFE note), term sheets etc. There’s a lot of ins and outs and complexity here, and it usually needs a lawyer.
For simplicity:
Understanding professional investors vs other types
There is a big difference in the types of people who will buy your shares / fund your startup.
Friends / Family / Fools
People most likely to believe in you no matter what (hi Mum!) and therefore will put their money in without too many thoughts about getting it back. Bless these people. They are the best.
High net worth individuals / Family offices / Angels
Usually people who are more patient and will take a small stake; the best ones can also make your business much better. Can come with opinions, some good, some... umm.
Venture capitalists (VCs)
People who take other people’s money to invest in startups on their behalf. They need to make big returns to make their investors happy. That leads to certain types of behaviour. But also a playbook + help (sorta).
Understanding VCs
Whose money is best is the logical next question.
My answer is simple. Whoever gives it to you at good terms that you like. Ha! 😆 How easy is fundraising?
Ok, ok, moving on, there’s a wide array of different terms etc. that make a difference to this question.
The main group we will write about here, as this is an early-stage startup handbook, and as they are the hardest group to understand, are venture capitalists (“VCs”) — professional investors who manage funds; a fund is given a stack of money to make investments in high-potential startups and early-stage companies.
Common terms you will hear when discussing VCs are GPs and LPs.
General Partner (GPs) run the VC itself.
They:
GPs provide not only capital but also, as they like to put it, strategic guidance and mentorship to startups.
It goes without saying: know how many companies your VC, and specifically, the GP who is trying to convince you to take their money, is “strategically guiding and mentoring”.
GPs act on behalf of the Limited Partners (“LPs”), or their investors, whoever provides the capital to the venture capital firms.
These might include:
LPs are 'limited' because they are not involved in the day-to-day operations or investment decisions of the VC. But they put money in, so they’ll be on the GPs if they think they’re doing a bad job. Basically, GPs are the founders, and the LPs are their investors.
(And yes, you too can go straight to their investors and get them to invest directly in you... but that’s time consuming and tricky. So here, we’ve focused more on getting through VCs, with the idea being that if you can get them to give you money you’ll well and truly be able to get their investors to give you money).
There’s a very clear dynamic to this relationship. VCs find companies and grow them for sale for a living and therefore their goal is:
To make 10x return on any investment
(The way they raise funds means that it is better to miss with 8 and go 10x with 2 than to go 2x with 10 companies). In other words, all that matters is going big or going home.
There’s a pattern to this, though.
First, they’ll be looking to see if there’s a big market. Billions are necessary. Otherwise, they’ll not be going big enough. Paradoxically, they’ll then look to see if you’re targeting a niche area in this big market. Why? Because you’ll have limited resources at the start and they will want to get your numbers going up as fast as possible.
But, but, but, I hear myself say… that doesn’t really always make sense. (For us at for example, the whole point of AI is that it allows a much wider array of products to be made using the same structured data that is put into the algorithms, increasing the market! So you don’t need to worry about the old SaaS ideas of land and expand. Isn’t that good....? Hello?! Hi! ). Quite.
Source: Arrested Development, GIPHY
This is very much part of what you’re looking for in a VC. Do they get you? Really? And more importantly, their job is to find patterns, which means they are very good at knowing the status quo. You will need to be very clear in your head as to why you are not status quo, and deal well with rejection when they knock you back for, well, not being the exact thing the market is looking for at that time.
(Another very cynical way to look at this is that you should just tell them what they want to hear, and raise the money. We’re not into that in this book, mainly because it’s too bleak, and because it violates the only rule: don’t quit. It’s much easier to quit when you’re playing a game.
Please be aware that you’ll see quite a lot of it out there in startup land, and you’ll probably need your own reason as to why you don’t want to do that / way to deal with the frustration of watching it succeed. Which, in the short-term, it will. And yes, I’m well balanced — I have a chip on BOTH of my shoulders).
(Source: Arrested Development, GIPHY)
Remember, though, that VCs are trying to get 10x. So...
If you can get your numbers going up in the right way so that you can attract more capital in the next round at a higher price, fast, then they’ll get their 10x, and you’ll be their best mate 🤜🤛.
If you don’t, you won’t. That’s the game.
Need x10 return not x1 or x2 (Source: The Jetsons GIPHY)
There’s some patterns in what you get from VCs as well. Other than money, they tend to bring a lot of professionalism, product building and go-to-market sales experience. They’re good at shaping up your narrative and your numbers. And they will do a great job pitching your next round... because their pay depends on it.
How VC firms work
Another thing that can help is to create the box they put you in before they create it for you. In other words, if you know what they are looking for, give them the parts that you take care of and highlight how other parts of your team take care of the rest. Yes, this is formulaic and a little frustrating. But it follows the golden rule: whoever has the gold makes the rules.
The VC process can be broken down into five key stages
1. Deal sourcing & screening:
Seeking out promising startups and entrepreneurs. They may find potential investments through various channels, such as networking events, introductions from colleagues in the industry, or startup pitches. They then screen you to see if they want to put you in front of their investment committee. Much of this game is one of FOMO (fear of missing out); basically, your job is to look like you will make them 10x. The more senior the person screening you, the more things will go fast.
2. Due diligence & deal evaluation:
They will go through your company's business model, financials, market potential, management team, and technology or product. The earlier the investment stage, the more things like team matter, and that starts to shift to the financial models etc more at a later stage. Be aware that this is very, very subjective, and don’t let negativity get you down here. Also, sometimes they’re trying to see how defensive you get. Don’t fall for that.
3. Negotiation & deal structuring:
If the due diligence process is successful, the VC will offer or at least discuss a term sheet. A term sheet tells you how much they will invest, what they will get in return, and other terms related to management rights and governance. Once an agreement is reached, legal documents are drawn up to formalise the deal. Be very careful here: there are a bunch of terms that can be used to ensure that VCs get paid before anyone else does; the easiest way to see how much work something will be is to see if you can offer ordinary shares — if they say that they’d like preferred shares etc, then things get a bit more difficult. Also, watch for the board seats: that means control. Do not give them up lightly.
4. Portfolio management:
If you listen to VCs: after the investment is made, the VCs often take an active role in guiding the company towards success. They may provide strategic advice, make introductions to potential customers or partners, assist in hiring key personnel, and help the company secure additional financing if needed. In many cases, a representative from the VC firm will join the company's board of directors. In my opinion, this is also a bit of a beauty pageant. It pays to make the VC think that you are going places, as then they think you might be one of the 10x firms discussed above. Otherwise, things will go cold, until you start growing again.
5. Exit strategies:
Common exit strategies include an initial public offering (IPO), where the company's shares are listed on a public exchange, or a sale of the company to another firm, known as an acquisition or trade sale. This is where everyone gets paid. I find it easiest to think about this like getting into heaven. I know what I should do, but that doesn’t mean I’ll get in. It’s still good to know what to do, though, right?!
How do you find who to talk to?
You can hard sell, or you can ask for intros. If you are going to ask for intros, it can be useful to have collateral (see how to pitch, below; they will nearly always ask for a pitch deck). Also it can be handy to have an email:
An elevator pitch is a brief e-mail that a middleman can forward with a thumbs-up. You will need a few of these.
📧 Subject: Introducing Ning to Blue Shirt Capital
Hi [Middleman],
Thanks for offering to introduce us to Blue Shirt Capital. I've attached a short presentation about our company, Ning. Briefly, Ning lets you create your own social network for anything. For free. In 2 minutes. It's as easy as starting a blog. Try it at:
We built Ning to unlock the great ideas from people all over the world who want to use this amazing medium in their lives.
We have over 115,000 user-created networks, and our page views are growing 10% per week. We previously raised $44M from Legg Mason and others, including myself.
Before Ning, I started Netscape (acquired by AOL for $4.2B) and Opsware (acquired by HP for $1.6B).
Blue Shirt’s investments in companies like Extensive Enterprises tell me that they could be a great partner for Ning. We're starting meetings with investors next week, and I would love to show Blue Shirt what we're building at Ning.
Best,
Marc Andreessen
415.555.1212
What are they looking for at the meeting?
At the start, that’s easy. They’re looking for 10x, in their area of interest. (That’ll be up on their website, or LinkedIn, so have a look first. Ask them at the first meeting as your intro question, too).
At heart, though, it’s pretty simple: investors want to invest in growth . So, pull together your key metrics and wins, such as: your growth rates, revenue numbers, customer testimonials, user feedback, and achievements. Find data points that will get investors excited about your business. Then tell them how this has all been in the cause of making them more profits for their investors and really your dream is now to get eye-wateringly rich.
You and your investors (Source: Minions Rise of Gru GIPHY)
In terms of materials, I was told to prepare the following at a minimum:
But it’s a bit more complicated than that, really. It’s also a trust building exercise. In a relationship, trust is built over many interactions over a long period of time. You want to show some positive elements to get investors interested, but leave good content in reserve.
So, dangle the carrot, and do it in the way that suits you best. Ie:
After that, get out there! Try and get intros. Talk to lots of people. Learn your way of doing things.
Common reasons for passing without a meeting:
Common reasons for passing after one meeting:
Common reasons for passing in diligence:
😆 Source: Infinyte.club
Remember: if you feel like this, write it down. And figure out what you should have said; almost certainly you will be asked it many times again.
How to pitch
This is also a VERY large subject. The amazing people at Hustle Fund did a pretty good job of writing about this. It’s also something that is really good at. (They didn’t pay me for that, I wrote it myself.)
Source: How I met your mother, GIPHY
The goal is for your materials to tell a compelling story. They need to explain what you’re building, why you’re building it, and how your strategy will capture considerable revenue in the future.
The better this story ties everything together, the more your business will seem insightful. Ultimately we’re all human, and strong narratives that help explain the world around us are more compelling than a selection of disparate, albeit impressive, data points.
One way to do that is to start with the problem. Get into your customer’s head. Figure out what really, really, really grinds their gears.
Now, show how you have solved it for them, and how happy you made them. Then show how there are A LOT of people out there just as frustrated, and they too could be made very happy, if only they had your product. Add in how you will get the product to them, and who is building it, and that’s a heck of a pitch.
Another way is to start with why you started your business, and where it might go if everything works out as you hope. Don’t hold back here. People want to be excited.
But also, this is tricky: you are going to give words to things we rarely have the chance in our daily lives to examine. There is a fine line you have to walk: you need to know why what you’ve done is important to you — if you think it’s cool, and interesting, then others will as well. And you are much more likely to be passionate and engaged.
Once you’ve got them seeing the future, show them it is doable. There’s a technology that can make it happen. You even know all the right people to solve it. And here is how far you’ve got so far, without money — this is how much faster it could be if they give you some backing. There’s already people lining up to pay for it and it doesn’t even exist yet!
In both cases: you need to give people the sense you have momentum behind you.
In all these cases, something I learnt from Unsensible is that momentum is something of a byproduct of a good team, a growing market, a product that more and more people are interested in, and a possible future in which that becomes a big opportunity for someone.
That’s what you’re pitching, really: a train that’s rolling, now going very fast, in a direction you have sent it to, and it’s big and shiny and cool. People like trains. They’ll get on it. Your job is to tell them where it’s going and what type of train it is.
The three most common issues with pitches
Unsensible has a on this but here’s a summary of the three biggest problems that come up in pitches.
Problem 1: Generic problem statements
Don't just say "payments in emerging markets are hard." That's too broad, and everyone knows it. Instead, get specific – show your unique insight. For example: "Did you know that remittances out of Nigeria, worth three billion dollars a quarter, are being bottlenecked by a single bank?"
General problem statements reveal only general understanding.
You need to hook your audience with the problem before presenting your solution. Remember: this isn't a credentials presentation.
"I have to be interested in your problem and believe that you found a problem before I believe in your solution."
Problem 2: Everyone is a potential customer
If you're solving a payments problem in Nigeria, paint me a vivid picture.
Is it for mum-and-pop stores transferring money abroad? Or Nigerian students struggling to pay their international university fees? Tell me a story about the specific person whose life you're going to improve.
Here's the truth: if everyone's your market, no one is.
Problem 3: Completely undifferentiated solution
How are you different?
About 60% of startups faced this question because they didn't address it in their pitch.
I know that’s hard. So how about this: here’s a quick way to think about it put into 3 minute pitch format. Note that you can then restructure and expand this. Moreover, after doing the 3 minute version, I STRONGLY recommend you try and knock it down to 30 secs.
(How? Take all your lines from the 3 minute pitch and highlight the 3-5 that you feel best represents what you do. Summarise that into one sentence. Then paste those 3-5 things into one big ass paragraph and knock it down into a tight one para. Then finally, go back to your one sentence and make sure it still matches.)
In short...
Questions VCs will ask
Below I’ve compiled what the very excellent folk have as their questions. , their lead partner, has her most important questions in bold. I’m sorry for just pasting this in, but given they’re a VC and I’m not, it’s probably best to get it verbatim. (Huge props to all the VCs in this section for making their criteria so explicit. Thank you.)
Elizabeth Yin’s most important important VC questions
Problem you’re solving
Customer acquisition / unit economics / go-to-market
Fundraising / plans
Andreessen on what VCs look for
There’s another, slightly more macro way of doing this. That’s to find the template that lots of VCs secretly follow, and think through that.
Probably the most famous investor in the world for early stage tech startups is Marc Andreessen. a16z is about as famous as VCs get, and they have been extremely successful.
His way of doing things is as follows:
"If you’re an investor, you look at the risk around an investment as if it’s an onion 🧅. Just like you peel an onion and remove each layer in turn, risk in a startup investment comes in layers that get peeled away — reduced — one by one."
- Marc Andreessen
So what are the risks?
1. Founder risk: Does the startup have the right founding team? A great technologist, plus someone who can run the company? Is the technologist really all that? Is the business person capable of running the company?
2. Market risk: Is there a market for the product (using the term product and service interchangeably)? Will anyone want it? Will they pay for it? How much will they pay? How do we know?
3. Competition risk: Are there too many other startups already doing this? Is this startup sufficiently differentiated from the other startups, and also differentiated from any large incumbents?
4. Timing risk: Is it too early? Is it too late?
5. Financing risk: After we invest in this round, how many additional rounds of financing will be required for the company to become profitable, and what will the dollar total be? How certain are we about these estimates? How do we know?
6. Marketing risk: Will this startup be able to cut through the noise? How much will marketing cost? Do the economics of customer acquisition — the cost to acquire a customer, and the revenue that customer will generate — work?
7. Distribution risk: Does this startup need certain distribution partners to succeed? Will it be able to get them? How? (For example, this is a common problem with mobile startups that need deals with major mobile carriers to succeed.)
8. Technology risk: Can the product be built? Does it involve rocket science — or an equivalent, like artificial intelligence or natural language processing? Are there fundamental breakthroughs that need to happen?
9. Product risk: Even assuming the product can in theory be built, can this team build it?
10. Hiring risk: What positions does the startup need to hire for in order to execute its plan? E.g. a startup planning to build a high-scale web service will need a VP of Operations — will the founding team be able to hire a good one?
His advice for founders?
"Take a hard-headed look at each of these risks — and any others that are specific to your startup and its category — and put yourself in the VC’s shoes: what could [we] do to minimise / eliminate enough of these risks? Then do those things."
Another framework for looking at this is:
’s ladder of proof 🪜
The higher up the ladder you go, the more you de-risk their investment.
So what should I do for fundraising?
Here’s where you have to think like a founder. For founders, what you want most of all is cash and / or expertise. The challenge is to think about the tradeoffs that will arise from taking that cash, and also to think about what sort of cash you might want to take — and how you will get the expertise you need along the way.
The trick is usually to find a balance. Remember as part of that the goal is to toggle what you present to the world and what you don’t.
Find your own balance (Source: GIPHY)
In other words:
But in all cases, figure out what you think you are ready for, and then go hard for that. It’s a vision thing. Give them the vision, and then A / B test back and forth on what they liked or didn’t like until you hit on the thing that suits you for this particular wave of fundraising.
Remember that a very common toggle is that you will need to show that you can be a product / engineering type, and that VCs need scale, so if you can’t do product or engineering, you’d better find someone who can. Vice versa, if you’re a business type, you will need a technical type.
Finally, remember: your business is not you. You are a star just for having the courage to try. It’s a separate thing. Your startup is an egg 🥚, and you’re constantly up against the wall, as Murakami would put it.
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